- Rebalance your portfolio every year or when an asset class increases or decreases by 10-15%
- Avoid profiting from short-term market movements
- Take higher exposure to stocks only for long-term goals
- Invest in AAA-rated FDs, small savings plans, and debt funds for short-term goals
- Maintain gold investment within 5-10 percent of the portfolio
- If gold has exceeded 10% of your portfolio, move the excess to other assets
- Invest in real estate only for residential purposes
The rapidly spreading coronavirus has triggered extreme gyrations in various asset classes, from equity markets, from debt to even a safe haven like gold. The benchmark Sensex has fallen almost 30% from its all-time high. Fixed income products saw a sharp drop in interest rates. Debt funds suffered heavy repayments after the rise in bond yields. It only declined recently after the RBI cut the repo rate by 75 basis points, while gold is trading near its lifetime high after falling sharply in March.
With this volatility, your financial portfolio may have been derailed, not only in terms of yield, but also in asset allocation. But don’t give up hope. This is a great opportunity to rebalance your portfolio based on your life goals and risk appetite. If you are at a loss, how to rebalance your portfolio in the given market scenario, we explain how to do it:
The rule of thumb
After a sharp correction in equities, your share of equities in the financial portfolio may have fallen below your set targets. Consider rebalancing it to the desired level by the rule of thumb i.e. your exposure to stocks in the portfolio should be 100 minus your age. For example, a 25-year-old should have 75 (100-25) percent exposure to stocks compared to a 55-year-old, who should keep 45 (100-55) percent of stocks. Experts advise not to have more than 10 percent of the portfolio in gold and the rest you can put in fixed income or debt products. If you can take risks, you can increase your equity allocation by 5-10%, while the rest of the portfolio should be split between debt and gold.
To rebalance your portfolio, you have two options. First, if you have no additional funds to invest, you can transfer funds from assets whose proportion has increased to assets whose proportion has decreased. Second, if you have excess funds, you can invest them in the asset that has declined in proportion. Whichever option is chosen, the objective remains to achieve the desired portfolio allocation.
The correction underway in the market must look attractive in terms of investing in equities, given that the stock market is witnessing a sharp jump after a prolonged and deep correction. However, you should revert to your original asset allocation when rebalancing your portfolio, regardless of how well a particular asset is expected to perform shortly.
âIf your goals are very close (around one to two years), you just can’t afford to take the risk of investing in volatile assets, however promising that may sound. On the other hand, if your goal is greater than seven years. eight years from now, more of your investments should be in stocks because they have the potential to generate higher returns, âsays Raj Khosla, Founder and Managing Director of MyMoneyMantra.com.
Actions for long-term goals
If you are in your twenties or early thirties, you must have systemic investment plans (SIPs) in place in mutual funds for your long-term goals such as retirement or your children’s education. . Although your returns should have turned red, you should continue your SIPs and, in fact, invest more to get better returns whenever the market recovers. Take advantage of the market correction to exit or switch funds that have consistently underperformed benchmarks.
âUsually, most investor portfolios are too diversified with too many funds. It might be a good time to simplify and reduce the number of funds. If someone is already invested in four or five good equity funds with a track record of long-term performance and diversified market capitalizations, investing styles and experienced fund managers, they can continue with their existing funds, âsuggests Arun. Kumar, Head of Research at FundsIndia.com.
If you are a new investor, you should start SIPs in large cap and multiple cap funds or mid cap funds focused on large caps. Remember that quality stocks, not low net asset values, should be the criteria for selecting a mutual fund. âThe fund’s net asset value doesn’t matter. Don’t be fooled into buying funds with a low net asset value,â suggests Khosla.
For diversification, you can also choose international mutual funds. Tarun Birani Founder and CEO TBNG Capital Advisors advises investing in US-focused mutual funds. “The advantages of investing in funds focused on the United States are the fall in the value of the rupee against the dollar, the moderate interdependence between movements of the Indian and American markets and the possibility of investing in sectors. unique that are not available in Indian markets â.
Among stocks, choose blue-chip companies because they are the ones that rebound first when the market rallies. âMost companies are available at attractive valuations, although one cannot rule out a further fall in prices. But now would be a good time to tactically allocate more to stocks and keep buying stocks with every drop,â Sousthav says. Chakrabarty, co-founder & CEO of Capital Quotient.
Debt for short-term goals
If you are targeting goals in just two or three years, you should prefer debt instruments. Although debt instruments are relatively more secure, not all are risk free. Risk averse investors should prefer to invest in FDs, PPFs and small savings plans. Although interest rates on small savings plans have been reduced, these instruments still offer decent returns. You can also choose overnight, liquid, and short-term debt funds. âGo for short-term debt funds as bond yields have fallen sharply following the RBI’s rate cut. They might not fall further, so long- and mid-term bonds could generate negative returns within months. coming soon, âsuggests Khosla.
You can also consider corporate bonds and bank funds and PSUs, but be sure to invest in high quality papers. In the existing scenario, you should only invest in AAA rated corporate bonds and strictly avoid funds at risk of credit or those in sectors such as infrastructure and metals where the risk of default is higher due to the downturn. induced by the coronavirus.
âWhether you are investing in stocks or in debt, now is not the time to be adventurous. Risky debt instruments can offer returns 1 to 2 percentage points higher, but to earn an additional 1 to 2%, you could end up losing 100%. percent of your capital, âwarns Khosla.
What about gold and real estate?
Although most Indians prefer to invest in gold, gold should not be the core of your investment. It is better to avoid aiming for a lifetime goal around an investment in gold. âGold is at best a hedge against uncertainty and perhaps against inflation. Allocate no less than 5% and more than 10% of your portfolio to it,â says Khosla. With gold near all-time highs, your allocation may have gone above 10 percent. You can divert the excess gold investment into stocks to rebalance the portfolio.
When it comes to real estate, most financial planners advise investing in it for residential purposes only. You cannot compare real estate with other financial assets. Liquidity has always been the biggest challenge, which has become an even bigger issue now. âSelling a property at this stage would be difficult given the current situation. Even before the coronavirus crisis, the situation was not very good. One could consider doing it after the crisis is over when the chances of success are higher, âsays Suresh Sadagopan, Founder, Ladder7 Financial Advisors. If your portfolio is skewed towards real estate investments, you need to reallocate it to stocks or debt.
If you have a strong financial portfolio that is well diversified across various asset classes without any real estate exposure, you may want to consider exposure. But be careful in your selection. “A few factors such as the location of the property, the background of the developer, the location of the community in the property, the ease of resale or the upside potential of the property, etc., should be taken into consideration”, he explains. Himanshu Kohli, Co-Founder, Client Associates.
Rebalancing the portfolio should be an annual affair or whenever an asset allocation increases or decreases from 10 to 15. For example, people who had booked profits in stocks in 2019 when indices hit new highs, would would be protected from the stock market crash of COVID-19. âInvestors are caught in the timing of the market syndrome. They don’t want to sell when the stock market is peaking or buy when it is falling. Rebalancing is always a call against the tide, but it reduces portfolio volatility, âsays Khosla.